In an effort to shore up crumbling popularity as the corruption scandal engulfing his government inches closer to him, Brazil's President Luiz Inacio Lula da Silva has made a televised apology to the nation, appealing for the people to continue to trust him.

President Lula says he knew nothing about abuses by his party

But his protestations that he knew nothing about the abuses of which his Workers' Party is accused are being greeted with growing scepticism by many Brazilians.

First, party campaign manager Duda Mendonca told Congress he was not only paid for his electoral work using undeclared funds, but also that he was paid in the Bahamas, making the transaction a criminal offence.

Then Brazilian news magazine Epoca published an interview with the leader of the small Liberal Party, Valdemar Costa Neto, which ran allied to Lula's party in the elections.

He said Lula's right hand man, Jose Dirceu, promised to pay some $4m in return for their support.

He said the negotiations took place in the room next to Lula's office, and that Lula knew they were "talking numbers".

The cash was to help pay for the Liberal party's election campaign, he said.

Popularity fall

The president's office issued a statement denying the reports, saying that while Lula took part in political discussions to form a governing coalition, all other issues were left to party officials.

The claims are in direct contradiction to Lula's protestations that he feels "betrayed" and "indignant" at the scandal, trying to place himself on the side of surprised popular indignation.

He promised to punish those responsible, saying that if the investigation were in his hands he would have already done so.

The latest opinion polls show Lula's popularity has fallen badly and that he would now lose a presidential election to an opposition candidate.

"It is very ugly," said 53-year-old office assistant Ana Cristina Garcia, as she waited for a bus.

"We bet on the president and the Workers' Party because he always fought against such corruption among other politicians.

"And now we see the party using the same scheme. It's very sad. If Lula did not know about it, as leader he is still responsible."

Lula's Workers' Party is indeed being accused of abuses which have been normal practice across the political spectrum in Brazil.

In a political system with a large number of small parties in Congress and no party loyalty for voting, it is not the first time a president has resorted to paying for the electoral campaigns of allies to ensure enough votes to pass legislation.

Likewise the use of undeclared electoral funds is common, with several opposition politicians also implicated in the scandal.

Reform call

This may be Lula's strongest card. In his speech he said that punishment of offenders was not enough. He also called for far-reaching political reform.

"We have to take drastic measures to stop this situation being repeated in the future,'" he said.

Such reform is unlikely, however, to get through a Congress dominated by politicians who have long benefited from the system.

Some opposition leaders have instead now started talking about impeachment proceedings against Lula, although many analysts say they still consider this unlikely.

Vulnerable economy

Almost for the first time the scandal is also hitting the markets.

The Brazilian currency fell 3% on Thursday and continued its fall on Friday. The Sao Paulo stock exchange has also taken a tumble.

Lula's tight fiscal policy and economic reform program has been popular with investors. But the scandal has stopped reforms in their tracks, completely taking over Congressional time and attention.

Lula has several times said he wants to get non-partisan agreements to stop the scandal affecting the economy.

But given the vulnerability of debt-ridden Brazil to shifts in market confidence, that may be extremely difficult.